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Supreme Court Decides Fraud Perpetrator is Not Required to Reimburse Victim for Costs of Private Investigation

June 22, 2018

In Lagos v. United States, 584 U.S. ___ (2018), the Supreme Court issued a unanimous ruling that limits the ability of corporate victims of fraud to seek reimbursement of legal fees for internal investigations. The case began when GE Capital discovered that Sergio Lagos falsified numerous invoices for his company, which he used as collateral to obtain tens of millions of dollars in loans from GE Capital. After Lagos was convicted of fraud, GE Capital sought reimbursement under the Mandatory Victims Restitution Act of 1996 (the “MVRA”) for roughly $5 million in expenses, related to: (1) the company’s internal investigation of Lagos’ fraudulent conduct; and (2) the company’s participation in bankruptcy proceedings related to Lagos’ company.

After the Fifth Circuit affirmed GE’s claim for attorney’s fees, Lagos appealed to the Supreme Court, arguing that the MVRA’s requirement of reimbursement for expenses incurred “during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense” is not so broad as to encompass legal fees for private investigations and participation in bankruptcy proceedings separate from a criminal prosecution. Most appellate courts agreed with the Fifth Circuit’s expansive interpretation of the MVRA, with the Second, Sixth, Seventh, Eighth and Ninth Circuits requiring mandatory reimbursement of private investigation costs. However, the Supreme Court held that the plain meaning of the statute created a right to reimbursement for lost income, child care, travel costs, and other expenses when a victim (or the victim’s employees) miss work to participate in a criminal investigation or testify, but “the statute says nothing about the kinds of expenses a victim would often incur when private investigations or… bankruptcy proceedings are at issue….”

While this decision restricts the mandatory award of attorney’s fees related to internal investigations, its practical consequences remain to be seen. As the Supreme Court recognized, “more than 90 percent of criminal restitution is never collected.” Nevertheless, when a criminal defendant has the resources to repay a company for its costs of investigation, the decision does not impair a victim’s rights to seek restitution in a separate civil lawsuit.